Amazon Gets Personal With E-Commerce
Washington Post Staff Writer
Sunday, November 8, 1998; Page H1
Jeff Bezos believes the Internet store of the future should be able to guess what he wants to buy before he knows himself.
The 34-year-old founder of Amazon.com Inc. is a sci-fi buff who named his dog after the "Star Trek" character Kamala. Couldn't Internet computers compare his online book buys with the gadget purchases of other science-fiction readers, then infer that he might enjoy a wristwatch like the Seiko with the embedded radio transmitter he bought last year?
"It might figure out that I'm a nerd; I read science-fiction books," Bezos says. "Maybe I would be interested in the kind of watch that I have, which updates itself from the atomic clock 36 times a day. No normal person would have this watch."
Bezos erupts in laughter so deep it seems his body might disintegrate. He says he wants to make Amazon.com that smart, and that personal: "We can do that online. We can make it your store, tailor-made for you."
Bezos built what he calls Earth's biggest online book and music store, and it will soon start offering a full selection of videos. Asked what's next for the Seattle-based bookseller, Bezos answers that he will launch a shopping referral service to help his 4.5 million customers discover new products elsewhere on the World Wide Web. He also is redesigning his own online store to create a shopping experience even more personal than it is today.
As Bezos sees it, the success of electronic retailers will depend on their ability to analyze each customer's tastes and create unique experiences from the moment they walk in the virtual door. "If we have 4.5 million customers, we shouldn't have one store," he says. "We should have 4.5 million stores."
In a wide-ranging interview with Washington Post reporters and editors last week, Bezos outlined his vision for the future of online shopping. The man who pioneered large-scale Internet shops sees bricks-and-mortar stores remaining strong for a long time, while virtual ones become smarter, more helpful and more fun.
He paints a rosy view of electronic retailing, likening it to the days before the Industrial Revolution ushered in mass production and mass merchandising, when all clothes were custom-made and small-town merchants knew what their customers liked. The Internet can bring the personal touch back to commerce, Bezos contends, only this time on a mass scale.
If electronic "mass customization" tools are implemented wisely, Bezos believes they can improve people's lives by helping them find things they would never otherwise have. Privacy advocates are skeptical, fearing the new tools pry too deeply, exposing personal information that might prove harmful, embarrassing or just plain annoying.
Bezos worries that what he believes are unfounded anxieties could block people from enjoying the fruits of personalization: "I think the only drawback is there is a negative perception that this is a bad thing."
In at the Beginning
Amazon.com has etched itself into the Zeitgeist as a brand synonymous with the birth of Internet commerce. Founded in 1994 as an electronic bookseller, it added a full music catalogue and some videos this year, selling $153 million in merchandise during the quarter that ended Sept. 30.
Amazon sustained a blow Friday when it was announced that the company that supplied 58 percent of its books last year, Ingram Book Group, is being bought by competitor Barnes & Noble Inc., the nation's largest bookseller. Amazon has been setting up its own distribution centers and reassured investors Friday that it would continue diversifying its supplier base.
Amazon's $14 million in music sales for the quarter may seem small, but just three months of selling CDs catapulted the company to the Net's No. 1 music retailing spot. Its meteoric rise prompted its two leading music competitors, CDnow Inc. and N2K Inc., to announce a merger.
Amazon claims 85 percent of online book sales. But the Internet accounts for only 3 percent of the overall book market, and Bezos sees that growing to no more than 15 percent during the next decade.
In fact, he believes electronic retailers will put no bricks-and-mortar brethren out of business any time soon: "I don't believe you'll see lots of empty retail space." Predictions that the Internet will close stores remind him of how people thought television would kill the cinema. "That ignores the basic human need to congregate and to be together and to experience things in the real world," he says.
Bezos pooh-poohs speculation that Amazon aspires to be a virtual Wal-Mart Stores Inc., directly selling every product imaginable, or that it hopes to be the Microsoft Corp. of online retailing. E-commerce is too big for any company to monopolize, he says.
Bezos also denies interest in competing with Wal-Mart, despite Wal-Mart's pending lawsuit alleging that Amazon hired several executives to steal their knowledge of Wal-Mart's proprietary inventory technology. "Wal-Mart isn't competitive with Amazon.com," he says. "Wal-Mart reaches a different demographic. They have a different merchandise selection."
Nevertheless, Internet industry analysts say Amazon inevitably will broaden its merchandise. Why? Because the company remains unprofitable – it lost $45 million in the most recent quarter – and may have a hard time reaching profitability without new products and services.
Jonathan Cohen, first vice president and chief Internet strategist for Merrill Lynch & Co., is an Amazon skeptic. He says Amazon's current valuation in the stock market – $6.2 billion based on Friday's closing price of $124.56¼ – far exceeds its profit potential and will be difficult to sustain with Amazon's current retail repertoire.
"We are very close to a major competitive push by some very much larger companies," Cohen adds. "My expectation is that when those players come online, we'll see redistribution of market share."
Still, being today's stock market darling has given Amazon some advantages. It has bought five other Web companies this year using its richly priced stock instead of cash. Amazon bought the largest electronic repository of information about movies and videos – called the Internet Movie Database – and also bought an online calendar, address-book and reminder service with more than 1 million customers, all potential buyers for its products. And while Bezos won't talk about it, Amazon is constantly rumored to be on the prowl for Internet takeovers.
Kate Delhagen, director of retail research for Forrester Research Inc. in Cambridge, Mass., says Amazon appears to be executing a plan to dominate the sale of media products on the Net. She predicts that after adding a full line of videos and computer software, Amazon will go after toys and consumer electronics, categories that fit its goal of making personal shopping recommendations.
"Based on people's purchasing habits with music and videos, you can absolutely map some interests in consumer electronics," Delhagen says. "And with toys, they know a lot from people's book-buying habits. They can analyze the data and figure out, do they have kids? Do they have a lot of disposable income?"
A New Focus
Rather than sell new products directly, Bezos says Amazon.com for now is focused on developing the comparison-shopping technology it acquired when it bought Junglee Corp. Junglee created the Web-based software that powers shopping guides for Yahoo Inc., NBC's Snap and Lycos Inc.'s HotBot.
Amazon's purchase of Junglee puts those deals in jeopardy when they expire. Bezos says he's interested in developing alliances with Internet sites to help them sell merchandise, but he notes that Amazon is not in the business of licensing software. (The Washington Post Co. was an early investor in Junglee but sold its interest to Amazon.)
The Junglee purchase injects Amazon into the competitive comparison-shopping arena that Microsoft entered last month when it revamped its regional Sidewalk guides, adding a national focus and a consumer buying guide. While Sidewalk will try selling advertising to earn its keep, most online shopping guides don't rely on ads alone. They charge listing fees to merchants and collect commissions when customers click through to make purchases.
Bezos says he is still shaping the business model for Amazon's shopping guide. He expects it to involve revenue sharing between Amazon and the selling merchant, payment of commissions for directing customers to a particular site or some combination of the two.
Amazon was one of several big Internet companies that snapped up small shopping technology firms this year. The boom in comparison-shopping sites reflects accelerating growth in Internet retailing, analysts say.
Forrester Research had predicted U.S. online retail sales would total $4.8 billion this year. But it is now revising that to add several billion dollars. While that is still small potatoes in a U.S. retail economy of $1.7 trillion, profit-hungry corporations see online shopping as prime, unclaimed real estate of the future.
Online retailing differs in many ways from traditional retail, chiefly because of technology. For starters, the Internet allows consumers to research the features, price and availability of millions of products from a single virtual storefront. Imagine if Borders Books & Music placed a computer kiosk in its book aisles, allowing customers perusing gourmet cookbooks to go online and purchase a set of carving knives from Crate & Barrel. That's similar to the referral service Amazon is planning.
Most first-generation Web shopping guides allow price comparisons among many online stores, even though merchants chafe under the pressure it puts on prices.
Second-generation shopping guides are expected to be more polite, because their corporate owners see greater profit potential in working with other merchants than in starting a price war that might leave no one standing. But why would Amazon.com refer customers to other merchants, earning less profit and taking a risk that customers might not return? Why not just sell the merchandise directly?
Bezos believes his customers will come back; 64 percent of Amazon's sales in the most recent quarter were from repeat customers. He believes the Internet's retailing power lies in its ability to create a deeper relationship between merchants and customers, one that empowers customers and turns modern-day marketing on its head. Internet merchants must focus more on customer service, he says, and on the Internet, the No. 1 service consumers ask for is help finding things.
Bezos acknowledges the current crop of Internet shopping tools are crude and often unhelpful. He recalls getting frustrated when he went online to buy a miniature Canon ELPH camera recently because he wanted a tiny one to carry everywhere to create a visual documentary of his life on the Internet's frontier. ("I try to take at least one photo a day," he says with a chuckle, "and I'll get one before we leave, if I may.")
But because Bezos misspelled E-L-P-H as E-L-F while conducting his online search, the Net couldn't help him. He wound up getting in his car and driving to a big-box retail store to make his purchase: "It took me about 20 minutes; it was very convenient and a great price."
The Personal Touch
Some people find it Orwellian, but Bezos gets excited at the prospect of marrying comparison shopping with Amazon's personalization tools.
Amazon was one of the first Internet sites to customize pages for each registered customer, offering recommendations for books and music through a process called "collaborative filtering." Using mathematical formulas, it arrives at predictions by comparing a customer's previous purchases and stated preferences (click "Not for Me" to weed out lousy suggestions) with the preferences of other people who bought the same titles.
Bezos declines to describe how Amazon's recommendations have changed its customer purchasing habits, but studies at many Web sites this year suggest that personalization tools dramatically boost the frequency of return site visits.
Amazon's home page already greets customers by name. Bezos says the page will steadily grow more personal. If you buy many bestsellers, for example, a bestseller list might appear at the top of your home page; if you never buy hardcovers, your personal recommendation list might only list paperbacks.
There will even be a "serendipity" knob you can adjust on a scale of 1 to 10 to control the amount of randomness injected into recommendations the computer makes for you. "Crank it all the way to the right, and we can show you books you are guaranteed to hate," Bezos says.
His goal, of course, is the opposite: to sell more products by helping people find things that will enrich their lives.
"Probably everybody in this room has two or three books that they've read in their life that have blown them away," Bezos says. "I would propose that there probably are 500 books in our catalogue right now that could have that effect on you. But you can't find them; they're lost in the 3 million titles.
"Let's say right now there's a one-in-a-thousand chance that every time you walk into a bookstore you find one of these life-changing books. We want to make that a one-in-500 chance, work for another five years and make it a one-in-200 chance, and another five years and make it a one-in-100 chance."
Bezos compares Amazon's efforts to collect and share personal information with the efforts of doctors who swap case histories – all for what he calls "a common good."
"Personalization is like retreating to the time when you have small-town merchants who got to know you, and they could help you get the right products," he says. "The right products can improve your life, and the wrong products detract from it. Before the era of mass merchandising, it used to be that most things were personalized."
Bezos recalls how the Industrial Revolution created a production and distribution system that made it too costly to continue customizing products.
"The promise of collaborative filtering and what's called customization is you get to have your cake and eat it, too," he says. "You get the economies of mass merchandising and the individuality of 100-years-ago merchandising."
© Copyright 1998 The Washington Post Company